Tuesday, September 27, 2016

This is always a complicated question, since most people tend to think that their candidate won. And you may ask: who cares? After all debates have probably limited impact on the elections outcome anyway. But I think it is important to note that while most of the media (yes, I follow the liberal media) suggests that Hillary won (see here or here or here), one should take those results with a grain of salt.

I think the initial round on trade was clearly better for The Donald. Not only because he sounded more concerned with lost jobs, and deindustrialization in the Rust Belt, which he did (she said that she wants to bring back the 1990s; "I think my husband did a pretty good job in the 1990s. I think a lot about what worked and how we can make it work again..." were her precise words), but also because that is the main constituency for the debate. He was not trying to win the votes of African-Americans or Hispanics. That's why he double down on the law and order and nativist discourse. He wants the votes of blue collar workers in swing states, crucial ones in the old industrial belt. And he scored big there.

Also, while he actually gets his base excited, it's difficult to say the same about Hillary. And yes she sounds presidential. But the fact, that he doesn't sound presidential is what makes him appealing to his base. It's his strength not his weakness.

Winning the debate should be about that, who increased the chances of winning, and, if you ask me, he appealed to his base, and reached for blue collar workers for whom the economy has been terrible as he suggests, and for whom the 1990s Clinton policies that she thinks worked and can work again (hopefully not financial deregulation... or NAFTA, for that matter) were part of the problem.* The debate yesterday reminded me why I thought Bernie was the better choice, and I fear that's what many young (nope I'm not young anymore) progressives might have taken from it too.

Finally, it is important to note that almost everyone has been writing his political obituary since the election cycle started. His first answer, when he said he wouldn't support another GOP nominee was supposed to be the end. In the first debate. So most of the pundits saying she won now do not have a good track record. Even if many (not all, but some very visible, as per photo above) of his supporters are deplorables, it's worth noticing that their economic grievances are real.

Note that this doesn't mean he is going to win the election. Demographic changes make it harder for Republicans to win now, since Dems get more of the electoral college to start with. And I hope he doesn't, btw. But there are good reasons to be afraid. This is going to be way closer than it should be.

* The fact that she has not fully renounced Clintonomics, i.e. financial deregulation, austerity (End of Welfare as we know it) and free trade, is a problem for the progressive base of the party. She walked back some of these, mostly after pressure from the Bernie campaign, but is unclear that these changes would stick.

Friday, September 23, 2016

The paper by Paul Romer, The Trouble with Macroeconomics, has been in the news, and many bloggers have posted about it (Lars Syll here, to name one) and some of the major newspapers (for example, here and here). This follows his previous critiques on what he referred to as mathiness. It's also important since now Romer is the World Bank's chief economist. In all fairness, the only refreshing thing in the paper is the sarcasm, and the internal sociological critique of the profession that "places an authority above criticism."

This paper is better than the previous one on mathiness. He clearly notes that Real Business Cycle (RBC) models including in the synthesis version with New Keynesian models, the Dynamic Stochastic General Equilibrium (DSGE) models he discusses, use productivity shocks as something akin to phlogiston. He's not wrong. My favorite quote is this one also by Ed Prescott, Romer's bête noir, who argues that:

"In the 1930s, there was an important change in the rules of the economic game. This change lowered the steady-state market hours. The Keynesians had it all wrong. In the Great Depression, employment was not low because investment was low. Employment and investment were low because labor market institutions and industrial policies changed in a way that lowered normal employment."

So you ask: what was the negative shock that caused the Great Depression? Lucas, a mentor and friend of Prescott that shares his views, said (cited here) about this: "Where is the productivity shock that cuts output in half in that period?
Is it a flood or a hurricane? If it really happened, shouldn't we be
able to see it in the data?" [For more on the problems with the interpretation of the Depression go here]. And Romer is right also that Friedman's instrumentalism, the idea that it is "as if" there is a negative productivity shock, is not serious.

In his paper, Romer takes issue with Prescott's explanation of productivity shocks as being like "that traffic out there." Here is his explanation of why this is problematic:

"What is particularly revealing about this quote is that it shows that if anyone had taken a micro foundation seriously it would have put a halt to all this lazy theorizing [about imaginary shocks]. Suppose an economist thought that traffic congestion is a metaphor for macro fluctuations or a literal cause of such fluctuations. The obvious way to proceed would be to recognize that drivers make decisions about when to drive and how to drive. From the interaction of these decisions, seemingly random aggregate fluctuations in traffic throughput will emerge. This is a sensible way to think about a fluctuation. It is totally antithetical to an approach that assumes the existence of imaginary traffic shocks that no person does anything to cause."

This is very close to getting lost in the analogy, but at any rate, for what is worth, Romer is essentially fine with the methodological individualism of marginalism, and he implies that if you look hard enough you can find in the behavior of economic agents the reasons for why productivity fell and caused a Depression. There is no discussion of causality issues, which are central in the understanding of scientific differences, and why productivity might be endogenous. Romer perhaps thinks, not differently from Lucas or Friedman, that the Fed caused the Depression.

While the tone of the paper is that "Keynesian" ideas that money matters are relevant, and that RBC and DSGE models (or some of them) can't even get the effects of the Volcker stabilization right, it is probably true that Romer doesn't get it either. Anybody that worked with Phillips curves knows that the output gap is relatively weak, and that in order to get reasonable results supply side factors must be included (often the price of oil and other commodities). So the fall in commodity prices, and the indirect effects of the recessions on the bargaining power of the labor force (besides other things like Reagan's anti-union policies) played a role in the stabilization.

And should I mention that Romer writes a whole paper on the troubles with macroeconomics without one single note on the limitations of the idea of a natural rate of unemployment (or interest) and the inability of economists, which use it all the time for policy purposes, to even measure it? Oh well. Now the World Bank, with him as chief economist, will emphasize even more the need to spend on "human capital," because knowledge unleashes increasing returns and development. Yeah nobody though that education was central for development [and he doesn't even think of reverse causality]! Don't get me wrong, macroeconomics has been in trouble since the 1930s, when it developed as a field, but Romer's ideas are not particularly helpful. Being angry at RBC and New Classicals (angriness?) does not provide a clear path for macroeconomics.

PS1: I won't even go on the fact that he thinks that the Cowles Commission methodology is flawed, a position he shares with Lucas and Sargent. On that Ray Fair has said:"If the macro 2 [the RBC/DSGE models Romer criticizes] message is not sensible or its methodology is not feasible for estimating realistic models, it is perhaps time to move back to macro 1 [the Cowles Commission models that Romer also thinks are problematic]. This requires dropping the assumption of rational expectations and trusting the theory to impose exclusion restrictions." I may not agree with Fair, and other Old Keynesians (not sure he would like that label), on the restrictions that need to be applied, but at least methodologically we're on the same page. Not sure what Romer wants.

PS2: Romer doesn't even know of the problems with the growth accounting methodology and Solow's residual. On that see this paper by Jesus Felipe and Franklin Fisher.

Tuesday, September 13, 2016

After more than 7 years of economic recovery, the Federal Reserve is positioning itself to tighten monetary policy by raising interest rates. In light of the wobbly reaction in financial markets, an important question that must be asked is whether raising interest rates is the right tool.

It could well be that the world’s leading central bank is going about the process of tightening in the wrong way. Owing to the dollar’s preeminent standing, that could have severe global repercussions.

Just as the Fed has had to rethink how it combats recessions, so too it must rethink how it transitions from an easy monetary policy stance to a tighter stance.

Economists Who’ve Advised Presidents Are No Fans of Donald Trump -- Greg Mankiw's blog linked to this piece. I doubt that Feldstein is right. Yeah, Reagan "showed a real understanding of economics and international affairs." Funny thing is that the Donald's views on trade, because of his economic populism, might be more reasonable than the economics profession's dogma on free trade (my reply to Mankiw on free trade here). And nope I'd never vote for the Donald either, if you ask me

Meritocracy vs. Freedom -- Chris Dillow on Theresa May, but also on some deeper and more relevant, on whether free markets are compatible with meritocracy

Letter sent to Congress asks for rejection of the Trans-Pacific Partnership (TPP), in particular its Investor-State Dispute Settlement (ISDS) clause, which is the mechanism that gives power to corporations to challenge governments regulatory policies. It's important for society, here and in developing countries, to protect itself from the excessive power that Free Trade Agreements (FTAs) bestow on corporations.

Thursday, September 8, 2016

Lars Syll had a while ago a top 10 list of econ books. So here is my list of the best from the 20th century. Some are there because they are influential, some because I think they are truly the best, and all because in some way they influenced my views. The list by chronological order:

Wednesday, September 7, 2016

I've been trying to read this. Not a huge fan of the field of behavioral economics (or here; subscription required). Don't get me wrong, yes, it provides some critiques of elements of the mainstream (marginalist) approach, regarding essentially the notion of individual rationality, as did the work of, say, Herbert Simon, in the past. People don't tend to act in a rational way, at least not in the substantive way that is prescribed by the mainstream.

Evidence on the notion of universal selfishness is weak. Experiments have undermined the notion that the primary motivation of human action is self-regard. The ultimatum game, which has been played in many different countries and cultures, suggests that humans have a strong preference for fairness. Sam Bowles, who provides a short blurb for the book's back-cover, is one of the several progressive economists that thinks that the critique of rationality developed by behavioral economics is revolutionary, and that it is the source of an alternative to the mainstream (or probably more in line with his views of an evolution of the mainstream; he once said in a lecture at the University of Utah that Marx and Arrow said essentially the same things).

My view, and I promised a more detailed discussion when I'm done with the book, is that this is just one more iteration of the marginalist analysis trying to be relevant by introducing imperfections, the previous one being the idea of information economics, often associated with Joseph Stiglitz and George Akerlof, who is the co-author of the book with Robert Shiller. Stiglitz referred to his information economics as "Post Walrasian and Post Marxian Economics." It was very much in the Walrasian tradition, however.

In the case of behavioral economics, the notion that individual behavior is what matters continues to be central, even though the assumptions on how agents behave differ. The methodological individualist notion that all explanations must start from the microeconomic unit of analysis, and that microfoundations are central, prevails. The predominance of the individual over the whole. That is substantially different from what I would see as the main methodological stance of heterodox economics. Behavior is often discussed as being underpinned by social classes, as in the surplus approach tradition, and history and institutions are the basis for behavior. Markets often get stuck in sub-optimal positions, not so much because agents behave irrationally (even though they do, and behavioral insights might be incorporated in heterodox models), but because they work in different ways than assumed in marginalist analysis.

Issues of causality are considerably more important than behavioral issues. It is the structure of causality between variables that implies that effective demand (rather than Say's Law) holds, meaning that investment determines savings, for example. The same can be said about the determination of prices, where subjective elements are considered as given (and discussed at a lower level of abstraction, in historical and institutional fashion), and analysis proceeds from the objective elements associated to the technical conditions of production and a given distributive variable (again distribution being discussed at a lower level of abstraction, where the historical and institutional factors that affect labor legislation, the strength of unions, etc. play an important role).

PS: Besides these problems the book by Akerlof and Shiller starts by quoting Adam Smith invisible hand out of context, which is really problematic, and shows that the profession should go back and learn the history of its own discipline.

Friday, September 2, 2016

The natural rate is an old concept, well explained in Wicksell, that almost vanished (Keynes was explicitly against it, even though he partially failed to get rid of it), and has made a come back with the Neo-Wicksellian model that dominates macro today (misnamed New Keynesianism). Below the estimates published in the speech by John Williams.

Note that what seems to drive the natural rate of interest is the basic rate determined by the central bank. Either the fall of the natural rate caused the crisis, or more plausibly, the crisis forced the central banks to reduce the basic rates, and the average of the fed funds rate (which is essentially how they get the natural rate) has subsequently fallen. The same goes for the twin concept of the natural rate of unemployment that keeps falling.

Interesting thing is that for a while the very concept had lost some of its prominence. After the Keynesian Revolution, and particularly after the capital debates, mainstream economists were more cautious about bringing up the natural rate of interest. Friedman used a subterfuge to bring it back with the idea of the natural rate of unemployment. In part because of that, as it can be seen below, the use of the term natural rate of interest in four of the central mainstream journals (American Economic Review, Economic Journal, Journal of Political Economy and Quarterly Journal of Economics) fell in the 1970s, 80s and 90s.

Since the 2000s, there seems to be an increase in the use of the term (in my JSTOR search; note we have a few more years left in the last decade), and if Ngram viewer is correct, a decline in the use of natural rate of unemployment (although the increase in natural rate of interest is not visible in Ngram; one was a limited search in academic journals and the other is a very broad search in books, which may explain the different results). I might be wrong, but my guess is that the natural rate of interest, now that the capital debates are long forgotten, is being rehabilitated.

PS: First paper in 1913 by Irving Fisher, in the JSTOR search. Roy Harrod is the one with the most papers using the term natural rate of interest, followed by Dennis Robertson. In recent times the one with more papers is Michael Woodford. I excluded papers that were about history of thought, rather than about theory (very few anyway).

Jobs numbers out today. Employment increased by 151,000 in August, and the unemployment
rate is still at 4.9% according to the Bureau of Labor Statistics (BLS) report. This suggests that the slow recovery continues, and that to hike the rate of interest as it seems Janet Yellen suggested last week at Jackson Hole would be a mistake. By the way, Bill Gross, which sometimes sounds reasonable on spending and the effects of fiscal policy (or did in the past) suggested as an innovative solution the need for hiking rates twice before the end of the year. That signals, I think, what the market want, namely higher remuneration. But it would be a terrible idea. Even if the conventional story, best explained by John Williams from the San Francisco Fed, is deeply flawed. That is, the notion that the natural rate of interest (yeah, that concept) is now very low.